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What are the Pros and Cons of VC Firms and Angel Investors?

What are the Pros and Cons of VC Firms and Angel Investors?

The Advantages and Disadvantages of Using Various Investors!

Sometimes a fresh supply of cash is all an entrepreneur needs to put their business on the path to financial success. Unfortunately, one of the toughest challenges which start-ups face when it comes to transforming their innovative ideas into profitable businesses is of obtaining the funds that are needed to get their venture off the ground.

When it comes to funding for business, some of the potential investors that starry-eyed entrepreneurs often turn to for funds are angel investors and venture capitalists or VC investment. Both of which are able to provide unsecured financing to entrepreneurs, in return for shares in their business. However, since equity is one of the most expensive forms of financial options when it comes to business startups, considering the implications very carefully is extremely important for the success of any start-up business.

Venturing Out

VCs are private funds which are raised by management teams who are looking for a large ROI for their investment. The following are some of the pros and cons of using venture capitals.

Pros

They Provide You with the Cash You Need

Needless to say, VC investment dollars far surpass most of what can be acquired via debt capital. These companies have portfolios that range into the billions and an influx of high dollar figures into a startup can mean the difference between the success and failure of that venture.  For example, certain types of businesses, such as telecom and IT need a significant amount of capital just to be able to compete with others in the niche.

It’s Not a Loan

Walking down to your local bank for a business loan might seem like a convenient option, but it is more than likely that your friendly neighborhood branch cannot loan you the amount of money that you will require to get your start up off the ground. And if your loan goes into a default, it turns into a ticking time bomb, ready to go off and blow a hole of bankruptcy in your business.

On the other hand, VC investment is not a loan that needs to be repaid, the only reason why VCs inject money into a business is to get equity, that is, an ownership share in the company in which they invest in. The only reason why VCs take their cash out of a business is if it has been acquired by another company or goes public.

Additional Resources

Start-ups are usually fraught with legal and payroll concerns, along with taxation issues. It is not uncommon for Venture capital firms to provide their expertise and resources to a company in which they have a stake in.

Cons

Loss of Total Control

Despite the fact that you may have a pre-conceived idea for the success of your business, a venture capitalist will bring along their own set of blueprints so you may have to deal with ceding a certain amount of owner discretion. The bottom line is, if you find investors for your business that come in the following category, you may lose most of the control of your company, which mainly depends on how much cash you accepted from the VC investment in the first place.

Profit Share

The very nature of taking money from an outside source for funding for business, such as, VC investment means you will see a drastic cut in the percentage of the company’s profits. Before taking dollars from a VC investment firm, consider if your start-up is going to receive more or less money when all the parties involved have been paid their share.

Managerial Distraction

Focus is critical for the success of any start-up. Monopolizing a company’s dealings by including an outside source, such as a VC investment firm can lead to a meltdown, especially if the VCs ideas don’t mesh with yours. This can lead to some serious mistakes that can later on hurt the company’s reputation.

Apart from the pros and cons of VCs, the right venture capital firm can not only give you access to their check books, but also allow you to use their rolodexes and industry experience as well, which is a plus point.

Angel Investors

Angel investing is a common business practice in the U.S. and Europe. In the United States, the term ‘angel’ derives from the early twentieth century, when wealthy businessmen invested in lavish Broadway productions. Throughout Europe, angel investors are known as “business angels” who provide equity capital for growing startup companies. The following are some of the pros and cons of using angel investors.

Pros

Provide Needed Capital
When the money from friends, family and personal savings have been exhausted, you can find investors for your business in the form of Angel investors. Angel investor capital can provide a great source of funding for new businesses that can help fill the equity gap and give the startup business a high potential for growth.

No Need for Monthly Fees
Another benefit from angel capital is that there are no payment rates such as the ones that are required by bank loans and credit card companies. Many entrepreneurs enjoy this element of angel investors, especially those who are to free themselves from high monthly payments.

Flexible Business Agreements
Angel investors use an informal investment criteria as compared to the more traditional financial lenders, including banks and VCs. Because they invest their own money, their business deals are often negotiable. This amount of flexibility makes them an excellent choice for early-stage businesses that are scoping for funding for business.

Cons

Rarely Make Follow-On Investments
The reason why most angel investors are less likely to make follow-on investments is because of the risk associated with losing even more money, especially if the startup is unsuccessful.

Can Be Costly
In exchange for providing the startup capital for a new business venture, many angel investors often require a certain percentage of stake in a company, which normally starts from 10% and can go higher. From their perspective, this is a reasonable exchange since they are investing in a young and risky startup business.

Do Not Have National Recognition
On the downside, while there are well-documented directories of VC firms that are available, there is no national registration for angel investors. Due to this, angel investors do not have the national recognition as compared to their venture capital counterparts. They mostly seem to remain hidden and mysterious, but choose to do so they can be separated from the entrepreneurs, who often pester them with their business plans and telephone calls.

Some angel investors are enthusiastic about the opportunity to invest in a company in order to promote local economic growth, while others are only concerned with monetary gain. Despite these differences, the advantages of using angel investors for the funding for business seem to considerably outweigh the disadvantages.

Ending Note

An investor isn’t somebody who has golden wings and a halo that will shower you with money, but rather, is an individual who provides startup capital to new companies and expects a percentage of ownership equity in return. Whether one chooses an angel investor or a VC, the only way new entrepreneurs can decide which route will be best for them is by weighing their options. Associare.com is one of the best online resources for information on entrepreneurship and start-ups in various industries.

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